A WFOE is a 100% owned China subsidiary of a foreign investor.
It allows full control of a China business without a local partner.
Different WFOE types cater to consulting, trading, and manufacturing needs with specific requirements.
Setting up a WFOE requires a good knowledge of the Chinese legal system, but has become relatively straightforward.
For foreign investors looking to invest in China, selecting the right investment structure is crucial.
Foreign Invested Enterprises (FIEs) and the Foreign Investment Law from the legal framework that enables foreign companies to operate in the Chinese economy.
A Wholly Foreign Owned Enterprise (WFOE) is a specific type of FIE that grants foreign investors full ownership and control over their China business.
This guide provides a step-by-step overview of setting up a WFOE in China and other considerations you should keep in mind.
What is a WFOE?
A WFOE is a limited liability company that is 100% owned and operated by foreign investors. WFOE (or WOFE) stands for “Wholly Foreign-Owned Enterprise.”
It is a business structure that allows a foreign investor to do business in China without a local co-shareholder.
Chinese laws permit WFOEs in most industries, except those that are still somehow restricted to foreign investments (such as telecommunications or cultural activities, among others)
When deciding to invest in China, foreign investors traditionally have to select among three possible vehicles: (i) Wholly-Foreign Owned Enterprises or WFOEs, (ii) Joint Ventures or JVs, or (iii) Representative Offices or ROs.
Below is a snapshot of the key differences between these vehicles:
| Type | WFOE | JV | RO |
|---|---|---|---|
| Ownership | 100% foreign owned | Co-ownership between foreign and domestic investors | N/A |
| Permitted activities | All activities that are not prohibited or restricted for foreign investment | All activities that are not prohibited for foreign investment | Marketing and research activities only (not for profit making) |
| Legal identity | Separate from its investors and with limited liability | Separate from its investors and with limited liability | Only an extension of the foreign company. No legal personality |
| Hiring local employees | Allowed | Allowed | Allowed but only through a local employment agency |
| Key personnel/appointments | Legal representative, Sole Director or Board of Directors, General Manager, Supervisor | Legal representative, Board of Directors, General Manager, Supervisor | Chief representative |
| Time to set up | 1 month | 1 to 3 months due to the need to agree on the terms of the Shareholders Agreement | 1 month |
Types of China WFOEs
While there is no strict legal classification, the main categories of WFOEs are the following, depending on their business scope:
1. Consulting WFOE
- Simplest type of WFOE which functions as a consulting or services entity.
- Ideal pick for companies that want to provide services in or from China.
- A consulting WFOE does not require special licenses to operate unless it is active in a regulated sector.
2. Trading WFOE
- A type of WFOE that engages in the import and export of products to and from China.
- Allows businesses to trade, wholesale, retail, and franchising within China.
- Preferred option for companies engaged in the trading of equipment, garments, and more generally any products, etc.
3. Manufacturing WFOE
- A type of WFOE whose primary business is to manufacture products in China.
- Establishing a manufacturing WFOE in China is considerably more complex than setting up a consulting or trading WFOE. It requires more licenses and authorizations.
The type of WFOE depends on its approved business scope, as reflected in its business license. Generally speaking, any foreign enterprise in China is approved to conduct a primary business (resulting in its classification as consulting, trading, or manufacturing). Note that it does not prevent that enterprise from engaging in a “secondary” business. This means that a trading WFOE may still engage in the provision of consulting services as an accessory to its main business.
Benefits of Setting Up a WFOE
| Feature | Description |
|---|---|
| Control | Foreign owners have full authority over business operations and decision-making. |
| Profit Retention | All profits can be kept by the foreign owner. |
| IP Protection | Unlike joint ventures, WFOEs help safeguard intellectual property, as there’s no local partner who could misuse it. |
| Market Access | WFOEs offer direct entry into the Chinese market, allowing companies to gain insights into local consumer preferences and needs. |
Key considerations before setting up a WFOE
Potential Restrictions
While WFOEs are now allowed in most business sectors, some industries still require co-investment with a local partner. This is usually the case for sectors deemed as sensitive (telecommunications, health, cultural activities).
A quick look at the negative list of foreign investments (previously cataloged foreign investments) is required to ensure that WFOEs are permitted in a given sector.
Financing and Registered Capital
When it comes to financing a WFOE, investors have 2 options: (i) registered capital, and (ii) shareholder loan.
When it comes to registered capital, foreign investors are generally free to decide on the amount of registered capital of their China subsidiaries and its contribution calendar. Contribution is possible in cash or in kind. However, contribution in kind is more complex as only certain types of assets may be contributed to registered capital (land, registered intellectual property, equipment. Also, contributions in kind require appraisal by an independent appraiser.
Regarding shareholder loans, investors should be aware that they are limited in China. The amount of loan that a WFOE can borrow from its mother company corresponds to a fraction of its registered capital. In other words, the Chinese regulator encourages investment in capital rather than loans.
In terms of payment of a WFOE’s registered capital, since 1 July 2024, the registered capital of a WFOE must be fully paid within 5 years from the date of its incorporation.
It is essential to set the right amount of registered capital for your WFOE from day 1. If you set an amount that is too low, you will quickly need to increase your company’s registered capital, which will take time. If you set an amount that is too high, you may have no choice but to actually have to contribute it after 5 years.
Our recommendation is always to set an amount of capital that should be sufficient to cover your first 12 to 24 months of operations.
Location and Registered Address
The registered address of a WFOE must be a physical location. It cannot be a virtual office.
In practice, this means that your company needs to secure an actual lease agreement before it can be incorporated.
In addition to the registered address, it is key to decide on the right location for your WFOE. Most foreign investors prefer large cities such as Shanghai, Beijing or Shenzhen.
China also has many different Free Trade Zones (FTZ) that offer many benefits to the companies that they target. FTZs are usually industry-based and offer various incentives such as rental subsidies, lower taxes, and streamlined regulations.
It is essential to select the right location from day one, as changing the registered address of a company from one province to another or from a district to another is extremely difficult in China. Central districts of large cities still attract many investors but come with high costs. Free Trade Zones may be interesting but are usually far from city centers, meaning that qualified manpower may be difficult to find. Also, benefits in FTZ usually come with various conditions.
The location of WFOE determines where you need to submit the registration documents. Free Trade Zones (FTZs) in certain locations also offer tax incentives.
Choose a city that provides easy access to the workforce and clients for the business.
Management and Governance
Before applying to register your WFOE, you should consider how the following statutory positions will be allocated:
Business Scope Definition
In most countries, a company can engage in any business as long as it is not restricted or illegal.
Things are different in China, where a company may only operate within the limits of its registered business scope. This means that, at the time of registering a WFOE, it is crucial to set a business scope that accurately reflects the future business of the company.
As a company’s business scope appears on its Business Licence, it means that revising such business scope after registration requires applying for and obtaining a new Business Licence, which takes time.
A company may have more than one business activity appearing in its business scope. Usually, the activity that appears in the first part of the business scope is considered as the company’s primary business. For example, a manufacturing company will have a reference to manufacturing/production in the first part of its business scope. But it may also have other activities (such as maintenance services) appearing in the second part of its business scope.
How to Set Up a WFOE in China
Over the last few years, the process of registering a WFOE has been considerably simplified. While the administrative process used to take more than 1 month a few years ago, now it usually takes no longer than 2 or 3 days.
AMR (Administration for Market Regulation) takes 3 to 5 days to register a WFOE once the complete set of documents is submitted. Based on our experience, preparing and signing all relevant documents takes longer than the administrative process itself.
Step 1: Registered office space
As indicated above, a WFOE in China requires a local office address which is not supposed to be a virtual address.
Finding a proper location and signing a lease agreement is, therefore, a key preliminary step that usually takes time.
Step 2: Preparing the registration documents
The list of documents to be prepared for the purpose of registering a WFOE is as follows:
- Administrative forms
- Articles of association
- Incorporation documents and business license (or equivalent) of the foreign parent company
- Lease agreement for WFOE’s registered office
- Copies of passport/ID proof of directors and other representatives of the WFOE
- Shareholder’s resolution for WFOE incorporation
Note that all documents regarding the parent company need to be legalized and notarized (which can be very time-consuming). Note that since November 2023, China officially implemented the Apostille Convention, which should make this process much easier for foreign investors.
Step 3: Name Registration
The first administrative part of the registration process consists of submitting company name proposals for registration.
Note that Chinese authorities only take into consideration names in Chinese characters. In other words, any name in Latin characters is for reference only. Only the Chinese name appears on a WFOE’s Business License.
The name of a China WFOE includes several components: (i) its distinctive name, (ii) the place of its registration, (iii) its industry, and (iv) the fact that it is a limited liability company. For example, ABC (Shanghai) Business Consulting Co. Ltd.
Note that Chinese authorities tend to be very conservative and reject any name that may be regarded as similar or close to the name of another company registered in the same province or district.
Step 4: Filing with MOFCOM
Basic information regarding the company shall be provided to the Ministry of Commerce (MOFCOM) via the Enterprise Registration System and the National Enterprise Credit Information Publicity System:
- Registration documents and relevant application forms
- Information about the proposed WFOE, such as investment details and ownership structure.
Note that MOFCOM is not required to approve the information and documents provided. This step is for statistical purposes and record filing.
Step 5: Registration with AMR for a 5-in-1 Business Licence
The most important part of the registration process consists of filing AMR in view of obtaining the company’s Business License.
Note that while it used to be necessary to register with various administrations after obtaining a Business License, nowadays, Chinese authorities have streamlined the process and implemented a 5-in-1 Business License:
- Business license
- Tax registration certificate
- Organisation code certificate
- Social Security registration
- Statistical registration certificate
As indicated earlier, the AMR only needs a few days to process the registration and issue the WFOE’s Business Licence.
Step 6: Open bank accounts
WFOE in China must establish bank accounts, including a RMB account for daily transactions, a foreign currency account for international trade, and a capital account to receive contributions to its registered capita.
These bank accounts can be opened at local or international banks, submitting necessary documents like the business license and ID of the legal representative.
Step 7: Other post-registration formalities
Company chops
In China, almost all documents and agreements require using a company seal or chop. Company chops are seen as carrying the same official value as the legal representative’s actual signature.
Company chops are carved under the supervision of the Public Security Bureau. Electronic chops are used for online transactions and are legally equivalent to physical ones.
Here are the main chops used by a company:
| Type | Function | Mandatory for WFOE? |
|---|---|---|
| Official company chop | Signing all official documents on behalf of the company, such as while opening bank accounts | Yes |
| Financial chop | To carry out banking formalities, such as signing cheques | Yes |
| Contract chop | A standalone seal for executing contracts/agreements that bind the company | Optional |
| Invoice (fapiao) chop | To stamp tax receipts and invoices | Yes |
| Customs chop | To certify export/import declarations | Yes, if WFOE undertakes trading |
| Legal representative chop | To execute documents/agreements as the company’s legal representative. This can be used instead of signature. | Yes |
Other registrations
Depending on its business, a WFOE may have to obtain additional registrations, including but not limited to:
- Registration with Foreign Expert Bureau for hiring foreign workers
- Registration with Social Security and Housing Fund for employees
- VAT Taxpayer Registration
- Other licences/registration based on the business of WFOE
What are the Compliance Obligations of WFOE in China?
Key obligations include:
- File for Corporate Income Tax (usually at 25%), VAT, and other taxes on monthly, quarterly, and annual basis, as applicable
- Appoint a CPA registered firm in China to prepare an audit report
- Provide audited financial statements to the State Administration of Taxation (SAT)
- Undertake corporate income tax filing and annual reporting procedures at AMR, COC, tax bureaus, and the State Administration of Foreign Exchange
Taxation
WFOEs are subject to the following tax rates in China:
- Corporate income tax: 25% (lower rates may apply based on size and qualifications)
- Value-added tax: 3% – 13% of sales revenue (exports are exempted)
- Consumption tax: 1% – 45% of sales revenue (exports are exempted)
- Land appreciation tax: 30% – 60% of total transfer gains from state-owned land use rights, buildings, and attached facilities
- Stamp duty tax: 0.005% – 0.1%
- Resources tax: 1% – 20%, depending on the specific materials required
Wrapping Up
Setting up a WFOE in China is not entirely straightforward. There are several steps involved that can pose challenges and make the process stressful. The time taken for establishing a WFOE may also vary.
If you are on the lookout for a professional who understands the process of WFOE incorporation in China and can provide you with end-to-end services, contact Air Corporate right away!
